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Nobel Economics Versus Social Democracy

Of the elites who manage modern society, only economists have a Nobel Prize. Whatever the reason for economists’ unique status, the halo conferred by the prize can – and often has – lend credibility to policies that harm the public interest.

OXFORD – Of the elites who manage modern society, only economists have a Nobel Prize, whose latest recipients, Oliver Hart and Bengt Holmström, have just been announced. Whatever the reason for economists’ unique status, the halo conferred by the prize can – and often has – lend credibility to policies that harm the public interest, for example by driving inequality and making financial crises more likely.

But economics does not have the field entirely to itself. A different view of the world guides the allocation of about 30% of GDP – for employment, health care, education, and pensions – in most developed countries. This view about how society should be managed – social democracy – is not only a political orientation; it is also a method of government.

Standard economics assumes that society is driven by self-seeking individuals trading in markets, whose choices scale up to an efficient state via the “invisible hand.” But this doctrine is not well founded in either theory or practice: its premises are unrealistic, the models it supports are inconsistent, and the predictions it produces are often wrong.

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Avner Offer, an emeritus professor of economic history at the University of Oxford, fellow of All Souls College, and member of the British Academy, is the co-author (with Gabriel Söderberg) of The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn (Princeton University Press, 2016).

Please, reader, take a look at the list of Economics Nobel Prize winners and judge by yourself if the Nobel prize has been rewarding work that benefits the economic elites. https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/

I wonder if the author has even taken a few minutes to understand what the prize was given for in the last years. This year for instance it was given to work on contract theory, contracts are in fact the natural alternative to markets and if anything highlight the limitations of markets to achieve good equilibria. Last year it was given for work on consumption, poverty and welfare.

It's time to get over the Chicago boys and the Washington consensus years. That was 30 years ago already. It's unfair to all serious economist researchers to keep bringing up the simplistic idea that economics is about self-seeking individuals whose choices scale up to an efficient state. Because that's just not what modern economics is about. If you still think that's what economics is about you need to talk to an economist working on the research frontier, or read a top economics journal, or go to a conference, just get out there... economists are not that scary.

The new updated (2016) edition of “Inventing the Future – Postcapitalism and a World Without Work” by Nick Srnicek and Alex Williams explains the real thinking behind social democracy, which was the accommodation between labour and capital, at a time when labour held great negotiating strength and capital – to some extent – had to accommodate to a situation of placating labour through good pay and secure jobs.
The advent and growth of neo-liberalism due to the decline of Keynesianist social democracy has seen many of the gains of labour from the 1950s through to the mid-1970s reversed such that more of the surplus created now goes to capital in the form of a grossly unequal distribution of monetary rewards to senior directors and managers in the form of obscene-level bonus payments for what are often barely worthwhile performances.
The end result of this new “rip-off” economy is a growth in low paid insecure employment and a massive growth in food banks even for those in regular but low paid employment. Neo-liberalism has simply provided an ideological framework for plundering the lives and futures of working people all around the world.
Automation, robotisation and artificial intelligence are coalescing together to bring about a new world in which much human labour will be surplus to requirements.
New ideological and economic thinking for this emerging new world has yet to appear, though people like Nick Srnicek and Alex Williams – as well as others like Paul Mason – are trying to get there.

On a related matter I would like to suggest that Professor Offer's concept of "markets" is overly restricted. When he talks of markets he is really talking only of a small subset of possible markets: markets for goods and services. But there are many other types of market.

As a corporate financier , one of the markets one deals in is the "market for control". The control of corporations does not match the ownership of the underlying assets and income streams. To take a simple example, owning 51% of voting shares will generally confer 100% of control. In most developed countries corporations law seeks to bring the two back into alignment with rules on buying controlling shareholdings so that all shareholders may share "equally" in the value of control (the control premium).

If one is prepared to think outside the square and take this to its logical conclusion, it leads to a whole different set of possibilities for the idea of "social democracy".

In a previous comment I mentioned the monopolisation of the market for control WITHIN states: politicians and only politicians may exercise Legislative and Executive functions. Only in genuinely democratic states - like Switzerland - do the citizens have the same participation rights as shareholders in a corporation: the right of a prescribed minority to convene an extraordinary general meeting to vote on specific policies.

But under most developed country corporations law shareholders have another important right: the right of "secession" through the anti-oppression provisions.

It is this which leads us to the most radical concept of government: the "Coasian Polity Market".

In his 1991 Alfred Nobel Memorial Prize Lecture, Coase reflected on the thinking that had led him to his famous 1937 paper on the Nature of the Firm:

“The Russian Revolution had taken place only fourteen years earlier. We knew then very little about how planning would actually be carried out in a communist system. Lenin had said that the economic system in Russia would be run as one big factory. However, many economists in the West maintained that this was an impossibility. And yet there were factories in the West and some of them were extremely large. How could the views expressed by economists on the role of the pricing system and the impossibility of successful central economic planning be reconciled with the existence of management and these apparently planned societies, that is, firms, operating within our own economy?”

Coase’s insight in 1937 was to identify the essential similarity between “public” planning by the state and “private” planning within a firm.

But there is also a difference, as discussed in the famous (perhaps not so famous!) footnote 14 to The Nature of the Firm:

“It is easy to see when the State takes over the direction on an industry that, in planning it, it is doing something which was previously done by the price mechanism. What is usually not realized is that any business man in organizing the relations between his departments is also doing something which could be organized through the price mechanism. . . . . The important difference between these two cases is that economic planning is imposed on industry while firms arise voluntarily because they represent a more efficient method of organizing production. In a competitive system, there is an ‘optimum’ amount of planning!”

Economists have generally taken this to mean that firms and states are categorically different. Firms “arise voluntarily”. States don’t.

But if we dare to step outside the square for a moment, it provides an insight into what could be far-and-away the greatest economic and political innovation of the 21st century.

Governments and private firms are NOT categorically different. They differ only in that firms may arise voluntarily while governments are permanent regional monopolies.

(The UN Charter even contains an anti-competitive “market-sharing” agreement – the recognition of sovereignty – under which the regional monopolists have divvied up the planet and agreed not to offer services to people living in another monopolists’ territory!)

If we step outside the square, we might ask What if states did “arise voluntarily” through orderly secession?

Now there will be those who argue that "states" have a monopoly on altering rights while firms do not. But that is a circular argument. States have such a monopoly only if the "polity market" is set up a series of regional monopolies. After all, what is a “state” other than a collection of private individuals tied together by legal rights and obligations? And, on the other hand, a private firm can legally coerce individuals who are under a obligation to it just as a state can. Even with states, we see in federations how that "right to alter rights" is broken up to a degree. And historically we have had examples of such division: the medieval Church making some laws (e.g. marriage-and-divorce) for ALL people and ALL laws for some people (e.g. clerics) while the King made the rest.

So what might a “free market in government” - a "Marketplace in Sovereignty" - look like?

Following Coase, the scale and scope of states would adjust – just as the scale and scope of firms adjust – to provide the “optimal amount of planning” desired by the citizen-shareholders. Governmental authority would be optimally sized and optimally distributed provided that governments could “arise voluntarily” in a competitive system.

Now this might seem utterly unimaginable. But there are in fact embryonic movements in this direction.

The Texan “Municipal Utility Districts” may be interpreted as special purpose “micro-states” which arise voluntarily to provide specific services to their citizen-shareholders.

On a larger scale, Article 29 of the German Basic Law contains the theoretical machinery for minorities to secede from their Land even if the majority of the Land opposes it. Admittedly, that mechanism has never been used, but likewise the oppression provisions of corporations law are rarely used - but their very existence makes it unnecessary: potentially oppressive majorities know what will happen.

In principle, such a mechanism could be scaled up to create an entire “polity market” for all of Europe, or the United States (or Australia where I live)– or the entire world.

An essential step in this direction is the development of a “sovereignty market”, an institutionalised platform for allowing the voluntary exchange and pooling of “rights to govern”. This is already seen in “multi-speed” or “variable geometry” Europe: the various “Lands” of Europe (Euroland, Schengenland, Dublinland and Bolognaland) pool specific governmental powers.

Admittedly these have not always been efficient in scale or scope, but that’s because they’ve been created by monopoly politicians for political reasons (often megalomaniacal reasons!) rather than in response to the demands from citizen-shareholders.

So the other element is a central meta-government, or “meta-state” (Washington or Brussels, or Canberra even) which is charged with – and limited to – overseeing the orderly incorporation of states, liquidation of defunct states, mergers and demergers, and the rules under which such states contracted into the voluntary pooling of responsibilities.

Rather as the SEC in the US (or ASIC in Australia) oversees corporations but does not manage them, the meta-state would oversee states but not govern them.

The two limbs (sovereignty markets and the right to incorporate) work together: just as an efficient market in factors of production allows for smaller firms (with less internal planning) so an efficient sovereignty market allows for smaller states.

Unfortunately, none of this can even begin without addressing the biggest transaction cost barrier of them all: the current monopoly of politicians to initiate legislation within state. Until that is overcome, Elite politicians will think only in terms of increasing their own power.

But imagine a Europe, Amercia (or Australia) structured not as a deadening, centralised, anti-compeitive, monopoly state ruled by rent-seeking Elite politicians, but as a free market multiplicity of polities pooling their sovereignty to ensure the optimal scale and scope of planning for citizen-shareholders.

Avner Offer claims that, "Unlike markets, which reward the wealthy and successful, social democracy is premised on the principle of civic equality." But the most fundamental equality is still ruthlessly denied even under most social democratic systems. That equality is the equality of all citizens in choosing the system of government THEY prefer for THEIR country. So-called social "democracy" remains savagely ANTI-democratic by insisting that Elite politicians retain a monopoly on power.

We know from work such as that of Bower et al ("Enraged or Engaged? Preferences for Direct Citizen Participation in Affluent Democracies", 2007) that:

a) in almost all countries a clear majority of respondents agree or strongly agree with the statement “Thinking about politics in [COUNTRY] . . . . Referendums are a good way to decide important political questions”;

b) in countries where there is no outright majority support, a strong plurality of respondents agree or strongly agree (with some having no view); and

c) support is STRONGEST in that country (Switzerland) where people have the MOST experience of such decision-making.

We know from the historical record that in the few cases where citizens have been given a free choice (e.g. about half of US states, German lander, a handful of other jurisdictions) they almost invariably vote for the adoption of such a system.

Most importantly, we know that where citizens enjoy democratic rights they never vote to repeal them, even though it's a straightforward process to initiate a referendum for that purpose. (In some jurisdictions the attempt has been made . . . and defeated at the ballot box!)

Unlike the corrupt system of elective government, (which is still supported by many social "democrats") genuine Democracy demonstrates the ongoing consent of the citizens being governed.

Those who oppose genuine Democracy are the Elitists, (again, including those Elitists who like to label themselves social "democrats") those who would accept any form of government - no matter how bad, no matter how corrupt - rather than accept the notion of allowing the stinking masses, the riff-raff, the "plebs" - in general those whom they regard as their inferiors - having any effective say in the government of their country.

If Mr Offer is really interested in equality, does he support the equality of all citizens to decide - in a free referendum - which form of government THEY prefer for THEIR country??

Or is he yet another who wants to change the power structure only so that HIS team gets to run the show.

"deregulation of credit, which led to a deep financial crisis in the 1990s and anticipated the global crisis that erupted in 2008." ? Please. So bias and, with all due respect, weakly supported. Have you heard about Fannie Mae, Freddie Mac? Congress made them extend loans to risky agents, for sake of making homes affordable.... Please take a look at Charles Calomiris 's papers.

If we drop the dogma that government is more inefficient than privates in producing social goods, something that is easily verified not only theoretically but by evidence, and consider that with increased wealth comes increased spending in social goods (both at the individual and at the society levels), we conclude that the unavoidable trend is for more social state instead of less, like so many try to sell us every day.

I am a great defender of the markets, efficient markets I mean, but my defense also comes from understanding its limitations. Markets aren’t the design of a great entity, they are not an instrument of the will of a god who punishes the unworthy in a relentless way to the selection of the fittest. Markets are a human invention with great qualities but also many limitations, and only by understanding them we can truly defend its role in our society.

In the end we can’t maximize the hole by individually maximizing its parts; it’s not the way it works, not on a society level and not even at the firm or family level, this is a self evident truth, why we keep on insisting in the absurd notion I don’t know, maybe if people stopped looking for god on the markets we could move on…

All you have to do is read your co-columnist, Robert Skidelsky's book "The Essential Keynes" to understand that it was unfettered free market forces unleashed in the 19th century that powered the tremendous increase in wealth that makes it possible to tax a portion of that wealth for social programs. Keynes himself admitted that had entrepreneurial wealth been taxed away, the savings and capital reinvestment would not have occurred. In fact, Keynes concluded that had wealthy entrepreneurs kept their wealth and spent it on luxuries, the government would have expropriated it.

A market to be free requires some conditions, great number of buyers and sellers, Homogeneos products, no barriers to entry or exit and perfect information and transparency, now very few of this existed in the 19th century, wich was a century of monopolies and big companies, not free markets.

19th century was powered by humanism and the liberal movement, increasing health and living conditions, better access to education, the notion that we were in essence all equal. That's what powered the revolution...

The article very nicely portrays the seemingly unsolvable paradox in between our inherent human nature and the type of arrangement we should be living in.

Our inherent nature is "raw capitalistic".
We are all born with a completely self-serving, self-justifying and greedy nature but with very different hunger, willingness to sacrifice ourselves and others in order to satisfy that "raw capitalist" hunger.

This differing level of hunger, greed, willingness to sacrifice renders humanity alongside a pyramid, putting the most egoistic, selfish and greedy people on top with the less egoistic, selfish, less greedy people serving them.

Most of the time the "tip of the pyramid" has the upper hand but as they can't stop as an alcoholic can't sooner or later their artificial "Ponzi-scheme" exhausts resources, especially the humane ones and society, civilization collapses.
Then we start building another similar vicious, futile civilization on the same foundations until we reach a similar dead end crisis and another violent collapse.

At the same time we should actually follow a "communistic"/ "socialistic" model since we still exist within nature's fully interconnected and interdependent system where altruistic, mutually complementing collaboration rules. Without such "mutual guarantee" in between comprising elements the homeostasis necessary for life and optimal development would not be possible.

On the other hand we already know that "communism" or even "socialism" the way we tried so far can't work on the long term since it is against our inherent nature.
And coercing or tricking, misleading people into a system that is against their nature only guarantees a violent backlash as we observed through our history.

So the task ahead of humanity - in order to create a stable, sustainable human society, avoiding the recurring vicious cycles of the past and present - is to create such a "hybrid" societal model that can harness, use our inherent "raw capitalistic" human nature for the benefit of the whole collective in a way that is similar to nature's mutual guarantee sustaining homeostasis.
And we have to achieve all this through positive example, through real, positive inspiration where people join in and continue participating willingly.

With all due respect, this article is so weakly supported. "deregulation of credit, which led to a deep financial crisis in the 1990s and anticipated the global crisis that erupted in 2008." Have you read anything about Fannie Mae and Freddie Mac? and how politicians in Congress (maybe because of egalitarian purposes, trying to make house more affordable) made them take more risks with their borrowing? Lack of regulation? Please

First, social democracy is a system of government while economics is a field of study. They shouldn't be subject to outright comparisons as the one in the article. Second, the author shows little understanting of the broad scope of current academic thinking in economics. There is a lot more than the First Welfare Theorem and the " invisible hand".

A refreshing look behind the standard neoliberal cant that pervades these pages. And comparing the kinds of rigorous cognitive achievement involved in the science Nobels with that of the economics Nobel-like prizes, Bo Rothstein is onto something.

So the global elite fail to balance trade and the solution is authoritarianism. Just enforce balanced trade. Admit the mistake, provide a safety net with low taxes, and leave the rest of our freedoms alone.